Author Topic: Need help constructing a financial argument against a bad decision [UK]  (Read 3637 times)

Palindromeda

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Hi, I'm new here. I felt like this should be the right place for this, but if it needs moving to the new people subforum please do. I also feel a little embarrassed posting so soon after the guy in Oxford (I'm also in the UK but definitely didn't go to Oxford or make sensible decisions at his age). I'm in London, I'm 24 (F).

I have my student loans, which are 10,300 ($15,500). It's probably 10,000 round or slightly under once you deduct my student loan payments so far. They don't track this, you have to figure it out yourself, which I'm doing. Presumably so that you don't bother trying.

I have been saving to pay them off and have 12,400. I'm still doing the deducting part at the moment to work out exactly how much I need to pay back. I was already doing this before I found MMM, but MMM has been reassuring that I'm doing the right thing. I've been reading the blog posts and have read most of them, but I have NO previous financial knowledge and don't understand a lot of it yet. I've got a book on investing from the library that I've started.

One of my parents accidentally opened one of my bank statements so they know I have this money. They are not in favour of me paying back the loan, which they think is a waste of money at this age. I live with them, rent free, which is how I'm able to save at the moment. In May my mother had a cash crisis of 20,000 (c $30,000, more on that shortly) and I was afraid that she'd ask me to give her the money to help her pay it back.

That didn't happen, but what has happened is that they've offered to help me buy a house. I was immediately alarmed and just said I'd have to think about it, so no details were discussed. Presumably if I went through with the offer I would be expected to contribute the 10,000 to the deposit, and it would probably end up being a flat. I earn approximately just under 18,000 a year.

That's actually kind of irrelevant anyway because I absolutely don't want to do it. As I said I don't really know financially if I'm making the correct decision (I still not entirely sure I understand the MMM rent vs buy arguments* but I'm guessing they support not doing it?). The main reason I have for not doing it is that I don't trust my parents to not screw me over later. I think they probably do have the best intentions in making the offer now (and are certainly presenting the offer that way) but that these can only last so long.

Examples:
1) the 20,000 was a tax payback because my mother had been using a loophole that was closed; she was supposed to be retiring this year and now isn't for another 2 years to pay it back. I think my dad loaned her the money to physically pay it back.
2) it was my dad's idea for her to use the loophole in the first place and he set it up with his financial advisor because she doesn't know much about finances either; I distinctly remember conversations about how he would maybe use the loophole himself if it turned out to work for her in the long term. This has all magically been forgot, like a lot of things.
3) my dad has his own situation with his financial advisor and has been doing that for a long time, at least since my late teens. I disagree with a lot of what tax is spent on but I still think tax exists for a good reason. Both my mother and I work in the NHS.
4) When I started uni they said they would pay for all my student loans because they didn't want me to start life burdened by debt. Again, I think they believed that when they said it. I signed up to Student Finance England because they said it was the only way to take out the loan you needed to pay with and then when the letter arrived just handed it over like I should have known that was coming. If they hadn't spent the 3 years bragging to our other family that I didn't have loans because they were paying for it all, so all my cousins etc thought that too, I swear I would have thought I was schizophrenic.

I think it's understandable why I don't want to share a mortgage with them? but I feel like outright turning down the offer because 'I don't want to' will seriously offend them and make things extremely difficult for me. As I said, I don't know anything about how finances work so I want to present them with an argument that will hopefully make them back off, and I was hoping the people here could help with that.

I've also been doing some reading about housing now and it turns out that stamp duty on extra houses is going to go up in April, I would not be surprised if this influenced their decision to offer this now as they have known about my savings for a while.

I will be posting again as a case study, because I'm not happy with my job and prospects, and would like to move out once I have got my loan paid off, but that is for another post. Please ask any questions you need to ask. Please don't yell at me for having paid 10,000 for a degree that I literally do not need to do my job. I feel terrible about it constantly.

*for clarity of mind: the argument is that, if you pay 600 a month in rent for ten years you spend 72000 with no maintenance costs and if you had a house you would pay more over the same amount of time, plus repairs, you would sitll have the rest of the mortgage to pay, and the house would not necessarily be what it was worth when you got the mortgage for it and every house is going to depreciate some from being lived in. Is this right?
« Last Edit: December 01, 2015, 02:55:16 PM by Palindromeda »

AllieVaulter

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #1 on: December 01, 2015, 03:21:54 PM »
First off, you've stated that this deal makes you uneasy - TRUST YOURSELF.  I agree with your assessment.  You love your parents (I'm assuming), but just because you love someone doesn't mean you want your finances entangled.  Maybe especially because you love them.  Money problems ruin relationships, not just marriages.

I'm a homeowner, but I also rented for years.  Sometimes it makes more financial sense to rent than own, but even if it doesn't, there are a lot of downsides to owning a home:

1.  It is a TON of work.  Yard work (if you have a yard), maintenance issues, repair issues, insurance etc.  They don't give you a manual for your house when you buy it like a car, so a lot of issues are just surprises for a new homeowner.
2.  It ties you down in one place.  You think a lease is limiting?  If you own a house, you'll have to sell the thing before you move for a better job. Or you'll commit to an enormous commute.
3.  You're signing up for a lot of debt.  I have no idea about London's prices, but it's a city, so they're probably expensive.  You'll also be responsible for the interest on the loan.  You're not just signing up for the price of the house, it's the price of the house AND the interest. And any maintenance costs.

You're young and buying a house is a big decision.  You don't feel ready for it, so don't do it.  Tell your parents you don't want to buy a house just yet.  I would NOT tell them it's because you feel uncomfortable mixing finances with them.  Use your life (don't necessarily want to stay in your current job, considering going to grad school, it would make your commute longer, etc). 

Stay strong in your decision.  It might cause some friction, and your parents may even insist you move out (people have odd reactions to disagreements).  Even if you have to move out and start renting, I still think you're making the right decision here.
« Last Edit: December 01, 2015, 03:23:48 PM by AllieVaulter »

TrMama

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #2 on: December 01, 2015, 03:51:35 PM »
You don't need to construct an argument. You just need to say, "No." As an adult, that's the only argument you need.

Since you, rightfully, don't trust your parents to not swindle you out of your hard earned money, I'd look for alternate accommodations. Find a flat, or a room, to rent and move out.

bridget

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #3 on: December 01, 2015, 04:16:47 PM »
You are right. Even if your parents had a sparkling financial history and were the most dependable people on earth, I would say to think long and hard about entangling your finances with them. If it goes bad (which in this case sounds likely), it can create huge financial issues for you and hurt your relationship with them. Even if it didn't go bad, there's something to be said about having the satisfaction of knowing you are a fully self-sufficient adult who is making her own choices.

Sure, you have 10k now that you could theoretically use as a down payment to buy a house. (Sorry, my US terminology might not be quite right in your situation). But you're 24. How do you know you will continue to have enough money to make payments on that house for the next 30 years? Or you wouldn't rather use that money somewhere else? Your parents say they will "help you," but I'm not sure what that means. I'm very worried that they will commit you to a purchase that you can't afford on your own, and then leave you high and dry in a place that is too expensive for you to keep up with by yourself. That would be a Very Bad Thing. AND, they've done it before! You know what they say, fool me once, shame on you, fool me twice, shame on me. Learn from your mistakes. You love your parents, but you don't have to trust them with your financial well-being. 

Stop beating yourself up emotionally about the student loans. It's in the past. Furthermore, you got them under false pretenses; if you had known your parents weren't paying for university, you might have made different choices.

If I were you, I would use your savings to pay off the entire student loan amount, immediately after you get the amount figured out. Your parents can't pressure you about what to do with that money if it's gone. At that point, you will have a fresh start. You can forget the student loan ever happened. You will be debt-free. It sounds like you will even have a little extra, to use as a cushion and to start your new savings. All financial strings that tied you to your parents are gone. You can start your new life, in which you enforce strict boundaries between yourself and your parents when it comes to money. Don't tell them anything about your finances, and politely deflect their advice. It will be healthier for all of you, and it sounds like you will come out ahead.

After that, I'd consider moving out (maybe looking for roommates to keep it cheap). It's hard to do that when you have a rent-free option, but it will be a lot easier to enforce your financial boundaries with your parents if you don't live in their house. That ultimately keeps your money safer, because it's separated from them.

Good luck!

Edited to add: TrMama is right. You don't need an argument, just say no. It's your money, do with it what like. You do not need to justify your decisions to them. If you need validation about your gut, we are here to tell you you're in the right; don't buy a house right now. Nothing about their plan seems like it fits where you are in your life.  If you just go ahead and pay off your student loan before you officially tell them "thanks but no thanks," it will be easier to hold your ground because the 10k will already be gone to your student loan and you literally CAN'T agree to their plan.
« Last Edit: December 01, 2015, 04:19:51 PM by bridget »

cerat0n1a

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #4 on: December 02, 2015, 05:52:17 AM »
Wow - tough situation. I think you already know what the right thing to do is and your problem is to do it without offending your parents.

I would caution that I don't think MMM's writings on rent vs buy really apply in the UK. Our property market is insane, particularly in London. At current interest rates, buying is much cheaper than renting, provided you have the deposit etc. to be able to make the purchase and of course large numbers of people are borrowing as much as possible in the belief that property prices only ever go up. Presumably this is your parents' thinking - get on the property "ladder" as soon as possible. You really need to be expecting to stay there for a few years to justify mortage fees, solicitors fees, stamp duty, estate agents fees when you sell etc. so if your thinking is that you don't want to commit to living in a particular place for 4-5 years then definitely don't buy. Renting a room on 18k a year in London is not going to leave you much free cash. Buying a flat on that money seems crazy, regardless of the level of parental help.

In terms of whether to pay off your student loan, there is a good explanation of the pros and cons here (for some people it is better to save the money than to repay early - depends on the interest you are being charged.)

http://www.moneysavingexpert.com/students/student-loans-repay

Doubleh

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #5 on: December 02, 2015, 06:28:35 AM »
DONT PAY OFF YOUR STUDENT LOAN!

Sorry for shouting but it is important - in fact I'm going to say it again: don't pay off your student loan! At the very least not until you have read and understood the link from Martin Lewis that Ceratonia just posted. I came here to post the same link, and it's so good I'm going to post it again:

http://www.moneysavingexpert.com/students/student-loans-repay

I realise this is counter-intuitive and runs against everything else you will hear on this website. The reason is that you are in the UK where student loans are a very, very different beast from the high interest commercial student loans everyone else here is talking about, and indeed from any other kind of debt.

UK student loans work more like an extra tax than a traditional loan. The rate of interest is set the same as inflation, so is basically the closest thing you can get to an interest free loan. You don't have to pay anything until your salary rises above a threshold, which I'm guessing means you probably have a zero or very low payment currently, and in the NHS are likely to for some time. And if you never earn enough to pay off the loan it will be forgiven completely. In fact I heard an interview today with the government minister who introduced 9k tuition fees and there was a very heated debate in government that they should call the new system a tax rather than a loan.

In short you will likely never again be able to borrow money as cheaply as this loan, and there is no real benefit to paying it off. Certainly if you did want to buy a house, now or in the future, or buy a car, or even have an emergency that you could currently cover out of your savings and end up needing to borrow, you would pay far more than you currently do on your student loan.

Pretty much the only argument for paying off the loan now with the cash you have, is if you don't trust yourself not to waste the money. Given how you are talking, and that you have been able to build this amount of savings, that doesn't sound like it fits you.

As to buying a house there are plenty of arguments against it, as outlined above. I second that mixing money and family gets complicated fast and it sounds like your parents are not the best people to do this with. No need to justify, just explain calmly that it isn't what you want right now and leave it at that.

shelivesthedream

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #6 on: December 02, 2015, 06:41:33 AM »
It's not necessarily the best thing for you to use the cash to pay off your student loan, but it may be depending on what's more important to you. You're in a pretty good situation to weigh up the options and make the choice that's best for you.

Option one: Don't pay off the student loan. Put the 12,000 in a stocks and shares ISA, buying a low-fee broad-based index fund. You make income-based repayments on your student loan which are always supposed to be "affordable", leaving you enough money to live on and save. Your student loan accumulates interest at a very slow rate (IT IS NOT THE SAME AS THE US - A UK STUDENT LOAN IS NOT A HAIR ON FIRE EMERGENCY) so you do end up paying a bit more overall. However, hopefully over time your 12k earns more money than the interest you pay.

Advantages: Hopefully earning more money on your savings than you pay in interest. Flexibility of having the savings on hand.
Disadvantages: Psychological burden of debt. Crazy parents wanting to get their hands on your money/make you buy a flat.

Option two: Use your cash to pay off the student loan. This frees up an amount of money each month that you were using to make loan payments to save.

Advantages: Psychological burden of debt is gone! Crazy parents don't think you have any savings any more and you can finally be rid of the lie that you do/don't have student loans.
Disadvantages: Probably not the best thing to do numerically. Reduces your flexibility as you have less cash on hand for a while.

Buying a house?
I think you live with your parents. Consider moving out, even if living at home means you save more money. Maybe they want you to move out (not in a mean way, but parents need space too and maybe they'd like to see you stand on your own two feet). However, really really don't rush out and buy a house. It's a big financial decision that you'll be tied to for a long time, and especially don't do it just because your parents suggest it. You need time to figure out what you want to buy, where you want to buy, what you can afford... and then you'll be stuck living where you bought the house or having all the hassle of selling it and buying again. I think you need to rent for a while anyway to work out what kind of place you want to buy! Renting is not throwing money away, it is buying flexibility and someone else to fix the boiler when it breaks.

ETA: I forgot to say, congrats on actually thinking about this for yourself! So many people wouldn't and would just blindly take their parents' advice. 10,000 in student loans is not that big a deal over here. Don't beat yourself up about the past (you can't change it and you presumably didn't know what you were doing at the time). However, this is your chance! Step up, take responsibility, and realise that you are in charge of your own life. Hurray!

Also, British houses do NOT depreciate, especially in London. House prices go up and down but fundamentally houses do not become worth less just because someone has lived in them. Maybe they do in America but not here!
« Last Edit: December 02, 2015, 06:44:58 AM by shelivesthedream »

cerat0n1a

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #7 on: December 02, 2015, 06:47:25 AM »
I think the point that doubleh is (correctly) making is that on an 18k salary, there is no prospect of having to pay the full amount back ever - and there is no point in doing so unless you expect a significant increase (>40k) in the near future.

Doubleh

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #8 on: December 02, 2015, 06:54:10 AM »
I think the point that doubleh is (correctly) making is that on an 18k salary, there is no prospect of having to pay the full amount back ever - and there is no point in doing so unless you expect a significant increase (>40k) in the near future.

My point exactly. shelivesthedream has given a very good and balanced assessment of the pros and cons of this decision and you would do well to read and heed her advice. My intention was to simply put the counterargument to show that this is a different situation than the usual hair on fire emergency as understood by those in the USA. Ultimately you may feel that, regardless of the numbers you still want to pay off the loan, and that is fine too. But at least do so in the full understanding of the facts.

FrugalFan

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #9 on: December 02, 2015, 06:54:28 AM »
It's not necessarily the best thing for you to use the cash to pay off your student loan, but it may be depending on what's more important to you. You're in a pretty good situation to weigh up the options and make the choice that's best for you.

Option one: Don't pay off the student loan. Put the 12,000 in a stocks and shares ISA, buying a low-fee broad-based index fund. You make income-based repayments on your student loan which are always supposed to be "affordable", leaving you enough money to live on and save. Your student loan accumulates interest at a very slow rate (IT IS NOT THE SAME AS THE US - A UK STUDENT LOAN IS NOT A HAIR ON FIRE EMERGENCY) so you do end up paying a bit more overall. However, hopefully over time your 12k earns more money than the interest you pay.

Advantages: Hopefully earning more money on your savings than you pay in interest. Flexibility of having the savings on hand.
Disadvantages: Psychological burden of debt. Crazy parents wanting to get their hands on your money/make you buy a flat.

Option two: Use your cash to pay off the student loan. This frees up an amount of money each month that you were using to make loan payments to save.

Advantages: Psychological burden of debt is gone! Crazy parents don't think you have any savings any more and you can finally be rid of the lie that you do/don't have student loans.
Disadvantages: Probably not the best thing to do numerically. Reduces your flexibility as you have less cash on hand for a while.

Buying a house?
I think you live with your parents. Consider moving out, even if living at home means you save more money. Maybe they want you to move out (not in a mean way, but parents need space too and maybe they'd like to see you stand on your own two feet). However, really really don't rush out and buy a house. It's a big financial decision that you'll be tied to for a long time, and especially don't do it just because your parents suggest it. You need time to figure out what you want to buy, where you want to buy, what you can afford... and then you'll be stuck living where you bought the house or having all the hassle of selling it and buying again. I think you need to rent for a while anyway to work out what kind of place you want to buy! Renting is not throwing money away, it is buying flexibility and someone else to fix the boiler when it breaks.

ETA: I forgot to say, congrats on actually thinking about this for yourself! So many people wouldn't and would just blindly take their parents' advice. 10,000 in student loans is not that big a deal over here. Don't beat yourself up about the past (you can't change it and you presumably didn't know what you were doing at the time). However, this is your chance! Step up, take responsibility, and realise that you are in charge of your own life. Hurray!

Also, British houses do NOT depreciate, especially in London. House prices go up and down but fundamentally houses do not become worth less just because someone has lived in them. Maybe they do in America but not here!

I'd be curious to know your interest rates but the above seems like a good assessment. There is also an intermediate to Options 1 and 2 where you use some of the money to pay off some of your loans and invest some of it. I think if you get along with your parents and they don't mind you living with them, you should continue to do that and save for a while (but don't let them see your bank statements!). If not, it may be time to move out. Perhaps you could find some roommates to reduce the cost. But definitely don't buy a house right now!

Rubic

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #10 on: December 02, 2015, 07:37:00 AM »
Move your 12,400 savings to a new account and set it up for online access only, i.e. no printed/mailed statements.  Nobody except yourself should have access (inadvertently or otherwise) to this information.  Use unique, robust passwords and change them frequently.

The_path_less_taken

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #11 on: December 02, 2015, 09:12:41 AM »
Move your 12,400 savings to a new account and set it up for online access only, i.e. no printed/mailed statements.  Nobody except yourself should have access (inadvertently or otherwise) to this information.  Use unique, robust passwords and change them frequently.


This, or have them delivered elsewhere...in the USA you can rent a box at the post office or a private company.

I think you should be quite proud of yourself for figuring this out, at your age. Kudos.

And you have: you are not comfortable with the offer, bottom line, according to what you've posted.

So....don't do it.

Whether that mean moving out or just saying "I'd really like to feel a bit more secure in a job I like before taking such a huge step, but appreciate the kind offer" or whatever.

Or actually moving out, getting a room mate situation somewhere. Only you can answer that.

But for SURE don't take financial advice from these people!!!

FLBiker

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #12 on: December 02, 2015, 10:31:24 AM »
I don't know if it makes the most financial sense, but I personally put off owning a house until I "had" to -- married, mid 30's, having a kid.  I'm glad I did.  There are parts I like, but there are other parts that are a pain in the butt.  That said, it probably does make good financial sense -- I pay less on my mortgage for a 4 bedroom house than I did for a 1 bedroom apartment (in the same city) but then again my timing was very good.

Instead of owning a home, I moved around a lot in my 20s, living in different countries, etc.  And if I were ever to be single again, I don't think I'd bother with a house.  If you're a big nester it's probably different, but I'm the type of guy who would (and did) live in an apartment for 4 years without putting anything on the walls.

I also think you're getting good advice re: not paying off the loan.  I don't know about the UK, but there are times when letting a loan ride makes sense.  In the US, w/ low mortgage rates, it's certainly not automatic that you want to pay off your mortgage as quickly as possible.

ShoulderThingThatGoesUp

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #13 on: December 02, 2015, 11:53:04 AM »
It sounds like you ought to move out.

Scandium

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Re: Need help constructing a financial argument against a bad decision [UK]
« Reply #14 on: December 02, 2015, 11:59:32 AM »
You don't need to construct an argument. You just need to say, "No." As an adult, that's the only argument you need.

Since you, rightfully, don't trust your parents to not swindle you out of your hard earned money, I'd look for alternate accommodations. Find a flat, or a room, to rent and move out.

Well, except she lives rent free with her parents. It seems like they want her to move out on her own, perhaps not unreasonably. Probably still best to say no to the house, but try to find a place to rent on your own, perhaps with roommates to help with the cost.